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Teleflex Medical Inc. v. National Union Fire Insurance Co. of Pittsburgh, PA

United States Court of Appeals, Ninth Circuit

March 21, 2017

Teleflex Medical Incorporated, Plaintiff-Appellee,
v.
National Union Fire Insurance Company of Pittsburgh, PA, Defendant-Appellant.

          Argued and Submitted August 3, 2016 Pasadena, California

         Appeal from the United States District Court for the Southern District of California, D.C. No. 3:11-cv-01282-WQH-DHB William Q. Hayes, District Judge, Presiding

          Paula M. Carstensen (argued), Jodi S. Green, and Barbara I. Michaelides, Nicolaides Fink Thorpe Michaelides Sullivan LLP, Chicago, Illinois; Paul D. Motz and John W. Patton, Jr., Patton & Ryan LLC, Chicago, Illinois; Christopher R. Wagner and David L. Jones, Gordon & Rees LLP, Los Angeles, California; for Defendant-Appellant.

          James Christopher Martin (argued), Melissa A. Meth, and Douglas C. Rawles, Reed Smith LLP, Los Angeles, California; Thomas W. Ports, Jr., Tillman J. Breckenridge, and Gary S. Thompson, Reed Smith LLP, Washington, D.C.; for Plaintiff-Appellee.

          Before: Diarmuid F. O'Scannlain, Johnnie B. Rawlinson, and Consuelo M. Callahan, Circuit Judges.

         SUMMARY[*]

         California Insurance Law

         The panel affirmed the district court's judgment in favor of the insured, LMA North America, Inc., and award of attorney's fees, and denied National Union Fire Insurance Company of Pittsburgh, PA's motion for certification of an issue to the California Supreme Court, in LMA's diversity contribution action against its excess insurance carrier, National Union.

         In Diamond Heights Homeowners Ass'n v. Nat'l Am. Ins. Co., 227 Cal.App.3d 563 (1991), a California appellate court held that an excess insurer has three options when presented with a proposed settlement of a covered claim that has met the approval of the insured and the primary insurer: approve the proposed settlement; reject it and take over the defense; or reject it, decline the defense, and face a potential lawsuit by the insured seeking contribution.

         Concerning LMA's breach of contract claim, the panel held that the district court correctly followed the Diamond Heights rule in this diversity action governed by California law because the case had not been overruled and was not distinguishable. The panel also held that the district court did not commit prejudicial err in defining the standard of proof applicable to LMA's breach of contract claim.

         Concerning LMA's bad faith claim, the panel held that the district court correctly concluded that the genuine dispute doctrine was subsumed within the standard Judicial Council of California Civil Jury Instructions for breach of good faith and fair dealing, which the district court gave to the jury. The panel concluded that the district court did not err in denying National Union's proposed jury instruction on the genuine dispute doctrine. The panel also rejected National Union's argument that it acted reasonably due to a genuine dispute existing about the application and viability of Diamond Heights. The panel held that a jury could reasonably conclude not only that the settlement was reasonable, but also that any dispute about coverage was less than genuine. The panel, therefore, rejected National Union's challenge to the bad faith claim based on the sufficiency of the evidence. The panel held that the district court did not err in awarding attorney's fees that LMA failed to segregate between work done on its recoverable and nonrecoverable claims. The district court concluded that the district court's chosen apportionment of the fees appeared to be fair under California law.

          OPINION

          CALLAHAN, Circuit Judge:

         In Diamond Heights Homeowners Association v. National American Insurance Co., 227 Cal.App.3d 563 (1991), a California appellate court ruled that an excess liability insurer has three options when presented with a proposed settlement of a covered claim that has met the approval of the insured and the primary insurer. The excess insurer must (1) approve the proposed settlement, (2) reject it and take over the defense, or (3) reject it, decline to take over the defense, and face a potential lawsuit by the insured seeking contribution toward the settlement. Id. at 580-81. Under Diamond Heights, the insured is entitled to reimbursement if the excess insurer was given a reasonable opportunity to evaluate the proposed settlement, and the settlement was reasonable and not the product of collusion.

         This diversity case presents such a contribution action. The insured, LMA North America, Inc. (LMA), [1] sued its excess insurance carrier, National Union Fire Insurance Company of Pittsburgh, PA (National Union), in connection with National Union's refusal to either contribute $3.75 million toward the settlement of claims brought by a third party or take over the defense. We must decide whether the district court erred in applying the Diamond Heights rule, instructing the jury, denying National Union's motion for judgment as a matter of law, and awarding fees and costs. We affirm.

         I.

         A. LMA's insurance policies

         LMA had two general liability insurance policies covering claims that LMA disparaged other companies: (1) a primary policy issued by Transcontinental Insurance Company (called CNA) with a $1 million limit, and (2) an excess policy issued by National Union with a $14 million limit.

         The National Union policy contained a "no voluntary payments" provision stating that "[n]o insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without [National Union's] consent." The policy also contained a "no action" clause stating in relevant part that "[t]here will be no right of action against us under this insurance unless . . . [t]he amount you owe has been determined with our consent or by actual trial and final judgment." The policy also recognized National Union's right to "participate" in the defense of a claim and, following exhaustion of coverage by the primary insurer, a "duty to defend" the claim.

         B. The underlying Ambu litigation

         LMA and its competitor Ambu distribute competing laryngeal mask airway products. In 2007, LMA brought a patent infringement suit in federal district court against Ambu related to certain laryngeal masks. Ambu filed trade disparagement and false advertising counterclaims, demanding $28 million. The counterclaims were premised on allegedly false, disparaging statements in LMA's advertising regarding Ambu's products. CNA agreed to defend LMA on the counterclaims. National Union does not dispute that the counterclaims were covered by its insurance policy.

         In 2009, the district court granted summary judgment in Ambu's favor on the patent claims and denied LMA summary judgment on the counterclaims. The district court stayed the counterclaims pending resolution of LMA's appeal. In 2010, the Federal Circuit reversed dismissal of the patent claims. Laryngeal Mask Co. v. Ambu, 618 F.3d 1367 (Fed. Cir. 2010).

         The parties then held a mediation on January 10-11, 2011. National Union did not attend the mediation, but CNA did. LMA's counsel, Stephen Marzen, updated National Union each day. On the second day, LMA and Ambu reached a conditional settlement agreement, under which Ambu would pay LMA $8.75 million for the patent claims while LMA would pay Ambu $4.75 million for the disparagement claims. The settlement was conditioned on LMA's ability to obtain approval and funding from CNA and National Union.

         While CNA committed its full $1 million limit, National Union was reluctant to recognize that Ambu's counterclaims could invade its coverage layer. On February 14, 2011, National Union requested an updated analysis of liability and damages from Marzen. Marzen had previously provided National Union with information regarding the counterclaims, including copies of pleadings and discovery, verbal reports, access to other information, and a January 22, 2010 case report assessing potential liability. The 2010 case report explained that, if the counterclaims went to trial, Ambu could support its damages claim by using internal LMA executive-level emails that suggested knowledge of a false advertising campaign. The report concluded that LMA's possible liability ranged up to $10 million, excluding potential treble damages.

         On March 17, 2011, LMA provided the updated analysis requested by National Union. The analysis concluded that, "considering the risk of a damages award substantially in excess of $10 million, and not counting the substantial defense costs to defend against the product disparagement counterclaims through trial, and possible appeal, $4.75 million is a fair and reasonable settlement of Ambu's product disparagement counterclaims." LMA also informed National Union that CNA had approved the settlement and committed its policy limit. LMA requested a prompt reply, explaining that "time is scarce."

         On March 23, LMA repeated its request for a response. Two days later, LMA again requested a response and clarified that National Union's options were to (1) accept the settlement, (2) reject the settlement and take over the defense, or (3) reject the settlement and refuse to undertake the defense, leaving LMA the option of pursuing reimbursement in a subsequent action.

         On March 25, 2011, National Union sent a list of questions to Marzen about the proposed settlement. Marzen replied four days later, and followed up with a conference call during which he again stated National Union's three options. National Union promised to respond by April 1, but later committed to "Wednesday [April 6] at the latest."

         On April 7, 2011, National Union declined to consent to the proposed settlement without offering to take up the defense. On April 13 and 14, LMA again requested that National Union take up the defense if it chose to reject the settlement. LMA stated that, absent a prompt response, LMA would finalize the settlement.

         Having still not heard from National Union regarding taking over the defense, LMA finalized the settlement with Ambu on April 18. LMA promptly notified National Union. On April 21, National Union advised that it would assume the defense of the underlying suit if LMA could "undo" the settlement. LMA promptly responded that the executed settlement could not be undone. LMA further stated that National Union had acted in bad faith in handling the matter, including by waiting until after the settlement to state a willingness to take on the defense, ...


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